US natural gas inventories
On Thursday, September 17, 2015, the EIA (U.S. Energy Information Administration) published its Natural Gas Weekly Update for the week ended September 11. The report showed that US natural gas inventories in storage increased 73 Bcf (billion cubic feet), causing inventories to rise to 3,334 Bcf that week. This was in line with analysts’ expectations.
What this means for investors
When inventories rise in line with market expectations, they shouldn’t affect natural gas prices much. This situation means that markets have already priced in demand-supply fundamentals. The difference between actual and expected changes in inventories can drive short-term prices.
Natural gas prices settled 0.3% lower on Thursday compared to the previous day’s close. In the next part of this series, we’ll take a detailed look at last week’s price movements.
Lower natural gas prices mean lower revenues for natural gas producers such as Chesapeake Energy (CHK), Southwestern Energy (SWN), QEP Resources (QEP), and Cabot Oil & Gas (COG). These companies earn less money when natural gas prices fall and more money when prices rise. All these companies combined make up ~2% of the Vanguard Energy ETF (VDE).
Lower natural gas prices may also negatively affect MLPs such as ONEOK Partners (OKS). Lower prices may dissuade producers from producing more natural gas, which would mean lower volumes for MLPs to transport.
The 73 Bcf net injection in the week ended September 11 compares to a net injection of 90 Bcf in the corresponding week last year and a five-year average net injection of 75 Bcf.
According to the EIA, from the week ended April 3, the beginning of the injection season, through the week ended September 11, net injections totaled 1,873 Bcf. In comparison, 2,045 Bcf were injected in the corresponding 24 weeks last year. The five-year average injection for the corresponding 24 weeks is 1,558 Bcf.
After the 73 Bcf build in the week ended September 11, natural gas inventories were ~15.8% higher than last year’s levels and 3.9% higher than the five-year average. Inventories have been outpacing the five-year average since the week ended May 29. This is bearish for natural gas prices.
The EIA’s September STEO (Short-Term Energy Outlook) report released on September 9 forecasts that inventories will total 3,840 Bcf at the end of the injection season in October. That would be 43 Bcf, or 1.1% higher than the five-year average.